hi david,

i’m confused of long expiry long call and something like that

those are mentioned in question no. 36 on page 129 in 08’ practice exam.

long expiry means a option with long maturity??

then why are gamma risk and vega risk equal to short expiry, long expiry respectively??

lastly, net long gamma is just plus gamma position, isn’t it?

thanks

suk

Hi suk,

long expiry just means option with long time to maturity, just as you say. It is odd language, in FRM context, since the authors are not using it.

vega is increasing with time, so vega risk implies longer maturity
gamma for ATM is the opposite: increases as maturity approaches

that’s why this is looking for long call (near expiration; gives high gamma) and short call (long maturity; gives high vega)

David

Can you also clarify the explanation for this question concerning gamma and delta? I automatically discarded answers A and D, since delta-neutral imposes less risk to price changes...so that leaves B and C.

I chose answer B since a positive gamma and positive delta position means much higher price sensitivity, but the correct answer was C. I played around with the greek worksheet, and I could not get the gamma graph to output a negative value for both the put and call, so I’m not sure how the answer could be C.

73) Which position is most risky?

a. Gamma-negative, delta-neutral
b. Gamma-positive, delta-positive
c. Gamma-negative, delta-positive
d. Gamma-positive, delta-neutral

ANSWER: C

You have gamma exposure that is directional

Dennis

The (derivative) gamma is always positive for a long call or put. But the position gamma ( = N*gamma ) is positive for the long option holder and negative for the short option writer. For example, if i write you 100 options with gamma + 0.1, then you have a position gamma +10 and I have a position gamma of -10. The option holder of either call or put (with necessarily a positive gamma derivative) is always in a positive gamma position and this is beneficial: a price change in stock plus or minus benefits the long call/put. Conversely, the short option (with positive gamma but negative position gamma) is always losing from gamma with price change

David